Malaysia Trade Data Adds to Unease

Malaysia’s exports continued to weaken Monday, another worrying sign for an economy facing increased investor scrutiny.

In recent years Malaysia has drawn strong inflows of capital attracted by brisk growth, stable monetary policy and benign inflation in Southeast Asia’s third-largest economy. But as U.S. Treasury yields have risen in recent months, investors are taking a closer look at Malaysia’s fundamentals – and they don’t like what they see.

Foreign investors sold MYR6.6 billion (US$2.04 billion) worth of Malaysian government bonds in June – the country’s largest-ever outflow in a single month – cutting foreign ownership of government debt to 46.8% from 49.5% in May. Data aren’t yet available for July, but Maybank Investment Bank expects such outflows to have continued.

That has taken a toll on the Malaysian ringgit. Most Asian currencies have fared poorly since May, when the Fed began talking about winding down its massive bond-buying program, but the ringgit has been among the hardest hit, slumping to a three-year low against the dollar last week.

Fitch Ratings last week cut Malaysia’s sovereign credit outlook to negative from stable, citing a lack of political will for reforms needed to shrink a budget deficit that has lingered since the Asian financial crisis 15 years ago. ANZ Group’s Daniel Martin predicts the deficit will come in at 4.2% of GDP this year, missing the government’s target of 4.0%.

Malaysia’s economy clocked its weakest growth in three years in the first quarter, and the World Bank in June cut its Malaysia growth forecast for the year to 5.1%, down from 5.6% last year.

Monday’s trade data showed exports falling for a fifth straight month, down 6.9% on-year, as tepid demand from the U.S., China and Japan hurt shipments of palm oil and electronics. Meanwhile, domestic demand has supported imports, narrowing the country’s trade surplus to multi-year lows and raising concerns that Malaysia could fall soon into a current-account deficit for the first time since the late 1990s – something that would likely further weaken investor appetite for Malaysian assets.

As growth is slowing, the country’s debt burden is rising: Federal debt stood at 53.3% of gross domestic product at the end of 2012, up from 39.8% just four years earlier and nearly at the government’s self-imposed limit of 55%.

That only heightens the need for reforms. But the National Front coalition, which clung to power in May elections with the slimmest majority in Malaysia’s history, hasn’t set a timeframe to implement a long-delayed consumption tax. The government also has done little to amend the subsidy system so that only low-income residents benefit from cheaper food and fuel.

The government did, however, find time for another handout: It recently announced a bonus for civil servants and government pensioners ahead of the Muslim festival of Eid al-Fitr, at a cost of MYR670 million.

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